Magazine

Why It's A Small World After All

July 30, 2006

By Ram Charan Radical change in the structure of the world economy is rare. But make no mistake: The emergence of world-class companies from developing nations is a shift that portends a new global game.

Indeed, emerging economies are no longer just about outsourcing or tapping into local markets. We are seeing the first wave of emerging-nation players that have clear advantages in their industries. Rather than the competition among three or four countries that long dominated global commerce, we have entered an evolving game of multiple geographies. The importance of that change -- and the challenge it poses to the dominance of the West and Japan -- cannot be overstated.

This seismic shift began roughly 10 years ago, brought about by three forces: mobility of talent, mobility of capital, and mobility of knowledge, thanks largely to the Internet. As a result, anyone from anywhere with determination can restructure a global industry. Lakshmi N. Mittal used knowhow from his family's steel business in India to build London-based Mittal Steel Co. (MT), the world's largest. Mexico's Cemex is a new world leader blossoming far from traditional business centers like New York and Tokyo. If India's Tata Motors (TTM) can develop a $2,000 car, it will become yet another.

The rise of these multinationals shouldn't be surprising in this age of globalism. But what few realize is that the advantages of such developing giants amount to more than cheap labor and low currencies. (Even companies that are lucky in those respects can have productivity and quality problems.) Instead, their leaders are good executors who see niches in the global economy and can tap world intellectual capital and financial markets to consolidate control across their industries.

Many of these companies are headed by entrepreneurs who were trained in the West and who know how to attract top talent from America and elsewhere. Wipro of India recruited Vivek Paul from General Electric Co. (GE), and he helped build Wipro into a highly profitable, global information technology powerhouse. Shanghai Automotive Co. recently hired Philip Murtaugh, who used to run the China office for its joint-venture partner, General Motors Corp. (GM). And Haier Group Co., China's $12 billion consumer-electronics leader, has given Mike Jemal, its U.S. president and a former New York electronics retailer, free rein to pursue markets where Haier wants to be at least No. 2 or 3 -- not just on cost but by embracing an almost manic customer focus to fulfill unmet needs.

First World businesses must recognize that top intellectual capital is available to local entrepreneurs in emerging nations, and they should expect intense competition from these newcomers at home and abroad. But such nascent competitors have another potent advantage: a lack of legacy costs that keep even the most savvy Western outfits from fully realizing the efficiencies of their size and market power. That's one reason budding multinationals will not be a passing fad. Ready or not, the globe is about to get a lot smaller.

Ram Charan is a leading U.S. management consultant and co-author of two business best-sellers.